I started thinking about how to pay for my sons college about a year ago when he was first born.
It was a sobering moment when I added up the monthly cost of baby food, baby sitters, day-care, diapers, clothes, doctors visits, insurance premiums and all of the other expenses associated with having a baby.
Adding a college savings plan to this list seemed overwhelming at first. So rather than staying up at night in a fit of worry and stress, I decided to take action and make a plan of how to pay for my sons college.
Now I am fully immersed in carrying out that plan, and with marvelous results (so far). Here it is, my plan: How to pay for my sons college.
Lets assume that you start the plan, like I did, when your son (or daughter) is born. At this point you have about 18 years before college. And let's assume that total monthly college expenses will be roughly $2500 per month for in state tuition, housing, food, books, etc... (not adjusting for inflation or appreciation or any variables like that, just to keep it simple math). And lets assume that it takes 4 years to graduate. Using these numbers (2500 X 12 months X 4 years = total cost of college $120,000). If you have 18 years to save, you would have to sock-away $555 per month. BUT, I have a better solution of how to pay for my sons college that will save me $76,800 ($355 per month) upfront and will also end up paying for my dream-house and a sports car after graduation. See the 8 simple steps below.
Step 1. Buy a starter house for you and your young family (Let's assume you want to live in Texas). Real estate experts agree that this particular point in time is a buyers market for this segment. Rates are low, prices are low, you should be able to buy a house for 10% below it's current fair market value. Most bank and HUD foreclosures are curretnly priced at this level, right around 90 cents on the dollar. Let's assume you called your favorite real estate expert in Hays county Texas (hint hint) and with his help (eh hem) bought a $120,000 house for $108,000 (90 cents on the dollar). You would then need to put down 10% of the purchase price ($10,800) in order to get a loan for the rest. Now you have about 20% equity in the house. Let's assume rates rise and you get a 5% fixed rate on a 30 year conventional the loan.
Step 2. Live in this house for 1 year (to satisfy owner occupancy guidelines for the loan)
Step 3. Buy a new house (repeat step 1) and rent out the first house. If you're doing business in Hays county (or another county with similar values) you should be able to rent out the first house for about $1250 per month. That being the case, your cash-flow situation looks about like chart below.
Step 4. Pay your mortgage on both houses but also pay the extra $230 month in cash-flow from house #1 as an extra principal pay-down every month. Just by doing this, the house will be paid off in 15 and a half years. Your son will be 16 and half years old.
Step 5. Repeat steps above and buy 3 more houses (1 per year) for the next 3 years. At the end of the 5th year you will have 4 rental houses with more than 20% equity in each and you will also have a homestead (house #5) in which to reside while your son goes through grade school.
Step 6. Fast forward to your sons 18th birthday. He will be heading off to college soon. He will be out of the house, away at college (hopefully Texas State - San Marcos), and costing you about $2500 per month. But you won't be worried about it one bit. You will have it totally covered. By this time you will have paid off 4 houses (no more debt service). Each rental house will be generating approximately $746 per month in cash flow. Multiply by 4 and you've got a passive income of $2,984 per month.
Step 7. Go buy yourself a sports car. You did it. Your son is out of the house, in college You have it paid for even and you even have an extra $500 per month in passive income (over and above your $2500 monthly budget for college expenses)
Step 8. Now fast-forward again, 4 years later. Your son is graduating college. He can find a good paying job (or real estate career) and start a family of his own. He will no longer need the $2500 per month from his loving parents. Now you will have this $3k in passive monthly income to supplement your retirement OR you could just sell all the houses and cash in about $480,000 to build your dream-house (in cash) or do whatever you want.
I hope you like my plan on how to pay for my sons college. It can work for anyone in Hays County Texas (and other similar markets in Texas).
Please Fill out my form! if you would like to see a list of the top 10 best foreclosure buys in Hays County Texas. Hurry while prices and rates are still low.
Thanks for reading.
-E. Scott Ross
E&T Real Estate Team.
Keller Williams Realty, SWMC